The United States Supreme Court handed class action defendants a major victory today in the case of StandardFire Insurance Co. v. Knowles (Supreme Court opinion available here).

The Class Action Fairness Act of 2005 (CAFA) gives federal district courts original jurisdiction over class action lawsuits where, among other things, the amount in controversy exceeds $5,000,000. In order to determine whether a claim exceeds that amount, the claims of all individual members must be aggregated.

In Standard Fire Insurance Co., the representative plaintiff, Greg Knowles, “stipulated” to limit the damages sought in his class action Complaint to less than the $5,000,000 CAFA jurisdictional threshold in order to avoid federal court jurisdiction. Notwithstanding plaintiff’s stipulation, Standard Fire Insurance removed the case from the Miller County, Arkansas Circuit Court to the Western District of Arkansas, and the plaintiff moved to remand. The District Court then held that the Mr. Knowles’ stipulation was sufficient for him to prove that the amount in controversy fell below $5 million, even though he had never been authorized to represent the class members or to stipulate away their rights. Standard Fire Insurance then petitioned the Eighth Circuit for permission to appeal, but that petition was denied without explanation. After Standard Fire Insurance petitioned for rehearing en banc, the Eighth Circuit issued a new opinion on the CAFA issue. In Rowling v. Nestle Holdings, Inc., 666 F.3d 1069 (8th Cir. 2012), the Eighth Circuit affirmed an order of remand under CAFA based on a stipulation by the named plaintiff purporting to limit the damages of putative class members to less than $5,000,000. After issuing the opinion in Rowling, the Eighth Circuit again denied rehearing to Standard Fire Insurance without comment.

In today’s opinion, the Supreme Court held that stipulations made by representative plaintiffs in class action lawsuits that purport to limit damages to $5,000,000 or less do not defeat federal jurisdiction under CAFA because such stipulations are not binding on absent class members. The Supreme Court reasoned that notwithstanding a stipulation of a representative class member to limit damages to $5,000,000 or less, the aggregated damages of all class members (representative and absentee) could still exceed $5,000,000, thereby invoking CAFA jurisdiction. Notably, the Supreme Court also gave some indication that a representative plaintiff’s attempt to limit damages to less than $5,000,000 to avoid CAFA jurisdiction could be used by a defendant to argue against class certification on adequacy grounds.

The objectives of CAFA are to “assure fair and prompt recoveries for class members with legitimate claims,” to permit federal courts to “consider interstate cases of national importance under diversity jurisdiction,” and to “benefit society by encouraging innovation and lowering consumer prices.” The Supreme Court’s opinion eliminates one tool savvy plaintiffs’ lawyers have employed to circumvent those noble objectives.

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Cozen O’Connor has a national team of attorneys experienced in handling food contamination and product recall coverage matters related to first-party, third-party and specialty policies. The firm also developed a Food, Beverage & Nutritional Products Industry Team to provide advice and counsel to a wide range of companies connected directly and indirectly to the food and beverage industry.

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